IPOs Spike Up in Q2 Will Google Keep the Rally Going?

The venture-backed IPO floodgates opened last quarter, and they didn’t even need Google to help pick the lock.

A total of 30 VC-backed companies priced IPOs on U.S. stock exchanges during the second quarter, according to Thomson Venture Economics (publisher of PE Week) and the National Venture Capital Association. It is the highest tally since 87 such companies priced in Q3 2000, and it represents more than a 130% jump from the 13 deals that priced during Q1.

Some 175 companies, including 79 that are venture-backed, are in registration, hoping the momentum will continue. But no one can be certain what will happen in the second half of the year, even as Google prepares to launch its $2.7 billion IPO in an auction-style offering that is expected to go out as soon as this summer. “If the market continues to hold, we’ll see IPO traffic continue to flow,” says John Fitzgibbon, an IPO analyst for Redherring.com. “Security markets are driven by interest rates, earnings and politics, and politics is a big question right now.”

Looking back at the second quarter, VC-backed companies raised a total of $2.18 billion, down from $2.72 billion in the first quarter. But the Q2 decline can be explained by the Q1 IPO of Semiconductor Manufacturing International Corp. (NYSE: SMI), which skewed the data by pricing a $1.8 billion offering in March. When you factor out that particular deal, the average deal size of venture-backed offerings actually increased from the first to second quarter, from $69.2 million to $72.6 million, respectively.

While the average offering size increased, many VC-backed IPOs have been unable to meet their offering targets. Of the 30 companies that priced, only five raised more than they sought. The rest came in under-target, including a quintet of drug companies that filed for $86.25 million offerings but only managed to raise around $35 million.

Because so many new issues have been “priced to sell,” their aftermarket performance has been strong, Fitzgibbon says. As a group, all of the IPOs that have priced this year (including non-venture deals) are up 11.7% from their offering prices, compared to a 2.2% gain in the Nasdaq in the first six months of the year, Fitzgibbon says.

He notes that 11 of the last 13 IPOs to price have been below their initial filing range. “Companies need the cash and are willing to accept what the buyers are willing to pay,” Fitzgibbon says. Another factor is that venture capitalists are encouraging companies just to get deals done so that they can get their money out, he says.

The majority of Q2 VC-backed IPOs (see chart, opposite page) have performed well in the aftermarket, with 20 trading at or above offering price as of market close last Wednesday. Blue Nile Inc. (Nasdaq: NILE), a Seattle-based diamond e-tailer, experienced the largest percentage increase in its stock price. It shot up 83% from its $20.50 IPO price to $37.61 on June 30.

Blue Nile raised over $56 million in VC funding from investors like Bessemer Venture Partners, Trinity Ventures, Lightspeed Venture Partners, Vulcan Ventures and Kleiner, Perkins, Caufield & Byers. Thanks to Blue Nile, Bessemer was one of the biggest IPO winners among VC firms in the second quarter. Its 2.8 million shares of Blue Nile were valued at about $107 million on June 30.

Another strong performer was Santarus Inc. (Nasdaq: SNTS), a San Diego-based drug company, which priced at $9 per share and closed at $14.75 last Wednesday. It raised over $90 million in VC funding, including investments from St. Paul Venture Capital, Domain Associates, Advent Venture Partners, JPMorgan Partners (JPMP), S.R. One Ltd. and Life Sciences Partners.

Santarus was one of the few drug companies to have great success on the IPO market lately. The quarter’s biggest aftermarket bust was Corcept Therapeutics Inc. (Nasdaq: CORT), which priced at $12 per share, but closed the quarter at $7.72. Corcept’s venture investors include Alta Partners, Sutter Hill Ventures and Maverick Capital.

The second quarter’s largest venture-backed IPO got done just last week. Life Time Fitness Inc. (NYSE: LTM) priced 9.9 million common shares at $18.50 per share, for a total IPO take of just over $183 million. The Eden Prairie, Minn.-based operator of family fitness and recreation centers had previously raised around $87 million in VC funding from firms like Norwest Equity Partners and Apax Partners.

Next up was Cabela’s (NYSE: CAB), a Sidney, Neb.-based retailer of hunting, fishing and camping merchandise. The company raised $156.25 million by pricing more than 7.8 million common shares at $20 per share. The company had entered into a recap deal led by JPMP last September, but is being counted as a VC-backed deal because JPMP did not take a majority ownership position.

Other big winners included Shanda Interactive Entertainment Ltd. (Nasdaq: SNDA) with $152.4 million, SiFR Technology Inc. (Nasdaq: SIRF) with $132 million and SalesForce.com Inc. (NYSE: CRM) with $110 million.

Additional reporting by Lawrence Aragon.